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GSK Pharma: Efficiencies drive growth

GlaxoSmithKline Pharma (GSK) has announced its 3QFY04 results. Despite a revival in the domestic pharma market, the company has posted a meager 4% growth in topline (GSK had recorded an impressive 10% growth during 2QFY04 when the domestic pharma industry was going through a tough phase). However, improvement in operating efficiencies has helped the company record a robust 55% growth in bottomline. For 9mFY04, GSK has reported a 4% growth in net sales and a 56% rise in net profit.

Results at a glance…

(Rs m)

3QFY03

3QFY04

Change

9mFY03

9mFY04

Change

Net Sales

2,974

3,104

4.4%

8,364

8,707

4.1%

Other Income

141.8

152.7

7.7%

307

383

24.7%

Total expenditure

2,435

2,325

-4.5%

6,856

6,682

-2.5%

Operating Profit (EBDIT)

539

779

44.6%

1,508

2,025

34.3%

Operating Profit Margin (%)

18.1%

25.1%

18.0%

23.3%

Depreciation

55

43

-21.9%

149

131

-12.1%

Profit before Tax

626

889

42.1%

1666

2277

36.7%

Extra-ordinary items

(21)

0

(53)

123

Tax

232

312

34.6%

604

825

36.6%

Profit after Tax/(Loss)

374

577

54.5%

1,010

1,575

56.0%

Net profit margin (%)

12.6%

18.6%

12.1%

18.1%

No. of Shares (m)

74.5

74.5

74.5

74.5

Earnings per share*

20.1

31.0

18.1

28.2

P/E ratio

14.9

16.4

*(annualised)

GSK managed to marginally outperform the industry growth rate during the periods under review. The company continued to reap rich dividends from its strategy of concentrating on few power brands the demand for which remained strong, resulting in a double-digit growth in the power brands portfolio. However, the cessation of ‘Ranitidine’ exports resulted in a 45% dip in export revenues, which put pressure on the topline.

However, despite slow topline growth, GSK managed to record strong growth in operating profits. This was primarily on account of higher sales of profitable brands and tight control over expenditure resulting in a 700-basis points improvement in operating profit margins. This coupled with a rise in other income (due to higher interest income), lower depreciation provision and extra-ordinary items have helped the company record a strong growth in bottomline. It is to be noted here that extra-ordinary expense during 9mFY03 relates to VRS and separation charges incurred by the company, while, extra-ordinary income during 9mFY04 relates to profit on sale of its property in Bangalore. The sale of GSK’s Mumbai property is expected to further strengthen the company’s cash flows.

Recognizing the growth potential in the domestic market with the implementation of product patents post 2005, GSK has decided to gradually launch new products. The company plans to make three new product launches every year. GSK is also planning to enter the high margin chronic areas of CNS and diabetes. The company is also aiming at bringing about a 50% improvement in its sales force efficiency by 2005.

At Rs 462, GSK is trading at a P/E of 16x its annualised 9mFY04 earnings. Although GSK plans to foray into the lifestyle segment, limited exposure in the same and high DPCO cover remain a cause for concern. However, in view of the impending implementation of product patent, the strategy adopted by the company for preparing itself for the same, its market leadership position and access to parent’s strong product portfolio, we remain positive about the long-term prospects of the company.

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